Ever since Facebook snapped up the photo-sharing service Instagram -- a price that began at $1 billion but ended up at $715 million due to Facebook's sagging stock price -- Facebook watchers have been looking for ways that the company will make money from Instagram.

The obvious path -- although certainly not the only one -- is by sprinkling ads across Instagram. That strategy, according to Sterne Agee analysts Arvind Bhatia and Brett Strauser, could generate $500 million to $700 million in advertising revenue over the next three years. Even better, they argue in a report today, those would carry wide margins for Facebook.

The analysts, who in November put a price target of $32 a share on Facebook's stock based on the company's ability to make money from mobile, pointed out that Instagram could also begin competing with companies like Shutterfly, which sell photography products and services.

Their optimism around putting ads on Instagram comes after Facebook earlier this week put into place new policies around how it collects and shares data between its businesses. The social network will now begin merging customer data from Instagram and Facebook, potentially helping the company better figure out what ads to serve up to users.

For its part, Facebook hasn't spelled out its business plans for Instagram, which is growing like crazy and now boasts about 100 million registered users. If it decides advertising is a way to go, doubtless it will tread carefully and run all sorts of tests to ensure its not scaring off Instagram fans by slapping up annoying ads.

Facebook's stock, still about $10 below its IPO price of $38, has been on a tear the last month or so, and today is up more than 2 percent in early afternoon trading. Bloomberg is reporting that the stock is getting a lift amid speculation that it will soon be added to the S&P 500 Index, which would mean it would become part of many mutual funds and index funds.

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Paul Sloan is editor in chief of CNET News. Before joining CNET, he had been a San Francisco-based correspondent for Fortune magazine, an editor at large for Business 2.0 magazine, and a senior producer for CNN. When his fingers aren't on a keyboard, they're usually on a guitar. Email him here.
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